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August 29, 2013

Nasdaq on Tech Glitches: Some Exchange’s Fault, Some Not

Nasdaq said Thursday that a preliminary internal review of the technology glitches that halted trades on Aug. 22 found “a combined series of technology events” — some clearly within Nasdaq’s control and some not.

In a statement, Nasdaq said that the exchange regrets the tech problems within the Securities Information Processor (SIP) for Nasdaq stocks, adding that the exchange intends to “take all steps necessary to address them to enhance stability and functionality of the markets.”

However, other issues contributing to the halt, Nasdaq said, “are more endemic to technology issues across today’s complex markets and will require a broader industrywide effort to resolve.”

The preliminary findings showed trading halted on Aug. 22 after “the SIP could not process quotes thereby impacting the fair and orderly functioning of the public market.” The catalyst for the SIP failure, Nasdaq said, “was a confluence of unprecedented events that overwhelmed the processing capacity of the SIP,” with high frequency trading not playing a role in the technology events.

“As with any technology system, the SIP has finite capacity,” Nasdaq said. A "confluence" of events "vastly exceeded the SIP’s planned capacity, which caused its failure and then revealed a latent flaw in the SIP’s software code," Nasdaq said.

“On the morning of August 22… a sequence of events combined to create an unprecedented volume of message traffic into the SIP; well beyond the system’s tested capacity of 10,000 messages per-port, per second.”

Nasdaq said that it is identifying “potential design changes to further strengthen the SIP’s resiliency, including architectural improvements, information security, disaster recovery plans and capacity parameters.” Nasdaq expects to present its “initial recommendations related to these changes to the SIP governing committee within 30 days.”

Nasdaq said that it is also undertaking a comprehensive review of the policies and procedures for communicating with customers, market participants and the broader public during marketwide events. “We are committed to reviewing and improving our communications practices with all stakeholders.”

Securities and Exchange Commission Chairwoman Mary Jo White said the same day as the halt that while the technical glitch that paralyzed trading on the tech-heavy Nasdaq for hours was “resolved before the end of the day,” the incident was “serious.”

White has vowed new trading rule will be put in place, and said that the malfunction should “reinforce our collective commitment to addressing technological vulnerabilities of exchanges and other market participants.”

She plans to meet at SEC headquarters in Washington on Sept. 12 with leaders of the exchanges and other self-regulators to address “the market data dissemination system involved in last week’s halt as well as other critical market systems and infrastructure issues.”